Running on Empty

Lured by a discount of 6 cents a gallon, Erin Farrow drove past a Chevron station to pump $50 of no-name gas into her Ford Explorer one day last week.

She certainly wasn’t drawn by the ambience at O’Brien Station in northern San Diego County. And two weeks earlier, the nurse from nearby San Marcos probably wouldn’t have stopped at all because O’Brien’s price was 20 cents a gallon higher than at the Chevron and an Exxon outlet not too far away.

“I drove this way on purpose,” said Farrow, a dedicated bargain hunter who thinks nothing of laying out food ads, plotting a course and driving from supermarket to supermarket to get the best deals. “This station usually has the lower prices.”

For the moment, station owner Barry O’Brien can afford to provide the savings. But red ink has been mounting since last year, when O’Brien left the branded market after 40 years with Mobil, then Arco. Starting out on his own, he installed matter-of-fact signs that read: “O’Brien Station. Snacks. Repairs. Gasoline.”

“For the last two months, I have not made any money. I don’t know how much I’ve lost,” he said.

In the gasoline world, motorists typically fill up at one of the thousands of Chevron, Arco and other stations adorned with familiar brands. But there’s also a hardy bunch of independent owners who sell fuel at discount prices under names such as Rotten Robbie, Magic Gas and Kwik Serv.

Although life for them has always been characterized by quick shifts between big profits and huge losses, unbranded retailers say they are struggling these days to survive in the most treacherous market in years.

Because of huge spikes in the prices they pay for tanker loads of fuel, stations not affiliated with oil refiners on average have sold gasoline at a loss for eight of the first 22 weeks of 2006, according to Oil Price Information Service, a Wall, N.J., company that tracks fuel markets. Most brand-name stations buy gasoline directly from refiners at undisclosed prices, but those that bought fuel outside of such contracts on average sold gasoline at a loss for two of the 22 weeks, the data service said.

In years past, independent station owners could weather the bad patches because they hit only once or twice a year and were relatively short-lived. But the tough times are coming more frequently and lasting longer now, many operators say.

Consumer advocates worry that the growing financial strain will wipe out the last of the state’s smaller, low-cost gas stations and weaken the competitive muscle of new fuel retailers such as Albertsons Inc., Costco Wholesale Corp. and Wal-Mart Stores Inc.

The independent outlets traditionally have offered motorists cheaper prices than branded stations because they can shop around for the lowest-cost fuel. Their presence, in turn, provides competition for the big-name brands.

“You sort of rely on the independents to keep the market in check, and their ability to do that is limited after bleeding so much money,” said Michael Shames, executive director of the Utility Consumers’ Action Network, a San Diego group active in gasoline issues. “What’s freaking out the independents is that they see no end in sight.”

For long spells this year, price breaks at the pump were rare among independent sellers. Hindered by wildly fluctuating wholesale gasoline markets in Los Angeles and San Francisco, the unbranded bunch frequently found themselves buying fuel at prices well above the going retail rate. To limit losses, they then had to post higher pump prices than their branded brethren.

On May 14, for instance, O’Brien was selling regular for $3.59 a gallon to cover his fuel bill. Nearly all his business migrated to the cheaper Exxon and Chevron. The station’s gasoline sales plummeted 60%, to 700 gallons a day, O’Brien said. And with so few cars at the pumps, business inside the convenience store also suffered, cutting into the most profitable part of his operation. Customers were so scarce, he said, “it would have been cheaper to close the station.”

During such times “you don’t just bleed, you hemorrhage,” said Tom Robinson, chief executive of Robinson Oil Corp., which operates 32 Rotten Robbie gas stations in the San Francisco area.

“I try not to be hysterical and doom and gloom,” said Robinson, a third-generation gasoline retailer. But, he added, “It’s pretty bleak. There probably are some big companies right now that are right next to the brink of bankruptcy.”

Economists say a properly functioning retail market includes a healthy contingent of small chains and unbranded stations that aren’t affiliated with an oil company.

California is already at a disadvantage in that regard. Eight of every 10 gallons of gasoline sold in the state flow through branded service stations, compared with the nationwide norm of seven of every 10 gallons, according to industry figures. In most cases, the strength of independent sellers lies in their ability to shop around for the lowest-priced gasoline instead of signing contracts to buy branded gasoline at set prices and volumes.

But that only works if the major refiners have fuel to spare -- and if they are willing to sell it to rivals. Many independent stations were once brand-name operations but fell out of favor because of business disputes or sales volumes that failed to meet corporate targets.

In general, service stations of all types -- branded and unbranded -- struggle when gasoline prices are on the rise. That’s because wholesale prices tend to rise faster than pump prices. In addition, dealers have to pay more for the fuel and their profits get squeezed by higher credit card fees because more people use their credit cards when prices are high.

Operators survive by riding out the losses and padding profits later. The most successful boost their bottom lines substantially by selling coffee or operating a car wash.

Pricing is especially crucial to unbranded sites because they typically lack the advertising, special credit cards and modern convenience stores that help branded sites attract customers.

“There’s always a certain amount of agony and ecstasy in the retail market,” said Tom Kloza, chief oil analyst at Oil Price Information Service. “Right now, it’s purely agony if you’re not tied to a refiner.”

A growing number of no-brand dealers are giving up or selling out, said Andre van der Valk, president of the Automotive Trade Organizations of California and the owner of two Shell sites, a Texaco and an independent station in Southern California. Others are seeking shelter from the volatility by signing up to sell brand-name fuel.

“There’s no predictability as to what the market is doing or why,” van der Valk said. “Some of the independents are saying, ‘Hey, wait a minute. We can’t take the cycle anymore.’ ”

Carl Boyett, chief executive of Boyett Petroleum, is seeing it firsthand. His company, based in Modesto, distributes fuel to about 400 stations that used to include only a handful of branded sites.

Over the last two years, about 70 stations have “branded up” to either Valero or 76. Boyett even converted one of his company’s 35 Kwik Serv and Boyett stations to a 76.

“Would I like to brand some more? Yeah, I probably would,” Boyett said. “We had a time a couple of weeks ago, where I was losing close to 40 cents a gallon. I could have closed and waited for normalcy, but then I wouldn’t have any customers.”

The transition is evident across the state. A Los Angeles gas station on Eagle Rock Boulevard, most recently a Spirit outlet, made the switch to Valero nearly two weeks ago. In the last 18 months, USA brand stations in Northridge and Fillmore were transformed into Shells.

Many of the converts have signed up with San Antonio-based Valero Energy Corp. because the company owns two California refineries but has a relatively small base of gas stations sporting its brand. Fewer have found a home among the largest oil brands because those companies have been whittling down their rosters of sites.

Even more disconcerting for drivers, the pain being felt by the small-fry independents is spreading to Costco and Wal-Mart, which have attracted throngs of customers by selling the market’s cheapest fuel.

That strategy has made such discounters, along with grocers like Albertsons and Safeway Inc., collectively the nation’s strongest new competitive force in gasoline in decades. It’s not uncommon for a single store to sell a million gallons of gas in a month.

But those companies must buy on the open market, contend with price gyrations and suffer through losses like the other unbranded players.

The strain is starting to show in Costco’s financial results, which have recently shown big jumps in gasoline sales and lower per-gallon profit.

So far, though, the big retailers appear undeterred. For one thing, their gas pumps play a role in ushering in new customers and boosting in-store sales, according to Costco Chief Financial Officer Richard Galanti. In addition, the operations in general add to profits despite periods of losses.

With gasoline now making up 6% of Costco sales, “it requires a thicker stomach lining because the profitability of the gas operation is more volatile, and as a public company you like to have better predictability,” Galanti said. Even so, he added, on the gasoline front, “our enthusiasm hasn’t changed.”

At O’Brien’s San Diego County station, enthusiasm for the independent fuel market is running low. Despite having left Arco in a bitter dispute, he is considering a move back to a brand. He tried Valero, but it wouldn’t sign him up because it supplies an Exxon across the street.

For now, O’Brien and his independent colleagues are “just hanging on by a thread,” he said. “If you’re not cheaper than the majors, then you don’t sell any gas.”